IMF Completes First Review of Croatia's Stand-by Arrangement

The Executive Board of the International Monetary Fund (IMF) completed today the first review of Croatia's 14-month, SDR 105.88 million (about US$147 million) Stand-by Arrangement. In completing the review, the Executive Board granted a waiver of the nonobservance of the structural performance criterion on adoption of guidelines for issuing government guarantees.

The Croatian authorities continue to treat the Stand-By Arrangement as precautionary and do not intend to draw the available financing under it (see Press Release No. 03/13).

"Croatia has made important strides in restoring robust economic growth and achieving price stability while continuing to strengthen its net international reserves position. These achievements owe much to a multi-year effort at fiscal consolidation and—albeit more limited—progress with structural reform. As a result of the fiscal adjustment, stabilization of the public debt ratio is within reach. A new challenge has, however, arisen as a result of an excessively rapid expansion of private sector credit, which has fueled import growth. The attendant sharp deterioration of the external current account was financed by foreign borrowing, which has pushed up the external debt ratio. An early reduction of the external imbalance has thus become an urgent policy priority for the Croatian authorities.

"The government's commitment to resist pressures to loosen the fiscal stance in the runup to general elections is welcome. With improved revenue prospects, the general government deficit is expected to decline to 4.6 percent of GDP in 2003. Further fiscal adjustment will, however, be required beyond 2003 as the fiscal and external current account deficits remain sizable. Higher than expected privatization receipts and a strict application of the new criteria for extending government guarantees should help stabilize or even reduce the public debt ratio. To the extent possible, the government is encouraged to meet its borrowing requirements in the domestic capital market, to promote its development, stem appreciation pressures, and absorb liquidity.

"The monetary authorities have had some success in slowing down credit expansion through administrative restraints. However, as these measures distort competition and encourage balance sheet manipulation, the authorities' decision to replace them with prudential measures at the start of 2004 is welcome. In the meantime, the authorities will carefully monitor external current account developments and where appropriate reinforce these measures by more traditional monetary tightening.

"The level of the exchange rate remains broadly appropriate. Although banks are well capitalized and largely foreign owned, the central bank's stepped-up efforts to warn economic agents about unhedged foreign exchange exposure and strengthen its capacity to assess risks to the soundness of the banking system are welcome.

"The pace of reforms has accelerated considerably with the recent parliamentary approval of new bankruptcy, budget, company, competition, foreign exchange, and labor laws. The government should now focus on public enterprise restructuring and privatization as well as remaining measures to promote Croatia's EU membership bid," Mr. Carstens stated.